Friday, January 22, 2010

The strange and mysterious case of ouch! potatoes

With India escaping the onslaught of recession and growth resurging, high liquidity and reduced farm output have turned old enemy inflation against the UPA regime once again, says anchal Gupta

In the early 1920s, the so-called “war guilt” clause of the Treaty of Versailles made Germany pay massive war reparations to the Allies. In 1921, the London Ultimatum made Germany pay 2 billion marks to UK in gold and foreign currency beginning a spiraling devaluation in the German currency. The Weimar Republic was plunged into the worst price rise in its history and the German mark crashed from a value of 60 marks to the US dollar in early 1921 to 8000 marks by December 1922. German debt and hyperinflation ruined its economy, an issue at the core of Hitler’s hatred as mentioned in Mein Kampf and eventually led to Nazi takeover. What followed was the darkest hour in all of human history. This was the first ever instance when the far-reaching effects of inflation were realised and recorded. Till date the mystic tale of love and hate between inflation and interest rate remains unsolved. And with India becoming a shining beacon of world economy, taming inflation remains the toughest nut to crack ever since its tryst with liberalisation began.

With the developed world just about standing up after falling flat from the worst recession since the Great Depression, India has already started running following big brother China. Prices of almost all consumer durables and property have remained cheap or risen only marginally in the last year. Halt! For the middle and upper classes buoyed by the wealth generated by a services-led economy and massive FDI completely forget that more than 70% of India’s population, which also forms nearly 90% of India’s electorate, spends more than 80% of its income on only feeding their stomachs. And with food price inflation reaching 20% in the last few days, there could not have been a more inflated New Year gift for the famished. There are a multitude of factors responsible for this renewed threat. Even rain god Indra turned its back to the poor and labour class already out of jobs due to dwindling exports with India registering its worst ever monsoon in 37 years. With food grain production sliding and tonnes of kharif crop wiped out by drought or untimely floods in some regions, there is a severe supply side constraint which has fuelled food prices. Simultaneously, with a huge chunk of the labour force out of jobs due to plummeting of fortunes of the textile, jewellery and leather industries, the millions of rural returning labourers are stretched to the hilt to afford two meals a day. Hence, despite the over hyped success of NREGA and the farm loan waiver put in place that brought UPA thumping back to power, Incredible India could face the same fate as ‘India Shining’.